Falling returns: is bitcoin underperforming against altcoins?

The first half of 2021 in the crypto markets brought many comparisons to 2017. Bitcoin (BTC) was on the verge of reaching an all-time high, the new frontier of decentralized finance emerged and non-fungible tokens were gaining a myriad of celebrity support.

But after the first months of euphoria and a massive sell-off that followed, BTC’s performance was much duller. The recent market liquidation resulting from the Evergrande crisis has heightened fears. However, it cannot be ignored that many altcoins, especially platform tokens, have undergone impressive runs and in some cases even withstood broader market trends.

With hopes still high that another bull run is likely during this halving cycle, should BTC holders be concerned that the flagship asset is underperforming?

2021 in figures

Between January and hitting its all-time high (ATH) of nearly $ 65,000 in April, BTC posted gains of 113%. Based on current prices, the year-to-date (YTD) gains are around 45%.

By comparison, Ether (ETH) gained 497% between January and its ATH in May, while its year-to-date has risen over 300% despite a recent assault.

However, even ETH’s impressive gains are nothing compared to competing platform tokens. Cardano (ADA) has posted a staggering increase of over 1,000% since the start of the year, while barely supporting real activity. Solana’s SOL has even eclipsed this figure, increasing by more than 8,000% since January. It comes after dropping from its all-time high above $ 200. Honorable mentions go to Polygon (MATIC), Avalanche (AVAX) and Terra (LUNA), all of which had impressive rallies in 2021.

Stephen Gregory, CEO of Currency.com, told UKTN:

“In general, there’s a lot of enthusiasm for Web 3.0, whether it’s powering the metaverse with ETH, or much faster transaction times with SOL, or whatever the future holds. ADA. People see holding Layer One protocols as a solid value choice for the future. Investing in solid technology and keeping up with the momentum and progression of the asset class following actual use cases appears to be prudent. “

Why do altcoins outperform BTC?

At first glance, the numbers do indeed seem to indicate that BTC is underperforming compared to other coins. One factor that could explain this is the law of diminishing returns. BTC is the oldest active and twice the age of ether. Although Bitcoin has generated mind-blowing returns over its lifetime - making billionaires early adopters - is it possible that the flagship asset may continue to generate triple or four-digit returns as it ages? Given that Bitcoin’s entire business model is based on the principle of diminishing returns, with overall rewards halved every four years or so, this seems plausible.

Additionally, as UKTN previously reported, as more investors and institutions accumulate, Bitcoin has started to mirror other assets. We can note this effect in the damping of Bitcoin’s volatility over time.

Arguably the only reason markets keep growing is because investors are continually looking for new, valuable assets. Therefore, although BTC appears to be generating lower returns, it should come as no surprise that investors are interested in more volatile assets to profit from price movements.

But that leads to other questions: is there a risk of creating a self-fulfilling negative cycle from BTC? As investors look to other assets for big gains, will BTC inevitably become less attractive?

Or, if we dare to imagine it, does the current appetite for platform tokens indicate that investor sentiment towards Bitcoin revolves around the ‘no intrinsic value’ argument? After all, stronger fundamentals and potential for adoption may be the only big selling point platform tokens have over Bitcoin.

Micha Benoliel, co-founder and CEO of the decentralized Internet of Things network Nodle, believes that platform tokens have a bright future ahead of them, but perhaps not at the expense of BTC. He told UKTN:

“I think the market is just starting to understand the value of blockchain ecosystems and services. This is why altcoins work so well. Bitcoin, which is more of a store of value, is on its way and becoming a crypto asset class with less risk and for people with a long term investment strategy.

Is $ 100,000 worth of Bitcoin still realistic?

From another perspective, even as Bitcoin’s yields decline from their all-time highs, gains continue to far outpace other assets, such as stocks and gold. At the current rate of decline, BTC will continue to outperform for some time to come. As such, it seems unlikely that an exodus is imminent. Daniele Bernardi, CEO of investment firm Diaman Group, told UKTN:

“Of course, Bitcoin appears to be underperforming small and mid-cap coins in percentage terms. But don’t forget the big capitalization difference. If BTC prices increased by 10%, it would increase market cap by $ 80 billion. If Solana, for example, increases by 100%, the real value of the market cap increases by $ 40 billion. For this reason, I don’t think there is any reason to doubt Bitcoin or of its position as a leading asset in the market.

As for the bullish trajectory, it’s also worth noting that in 2017 Bitcoin gained 1900% between January and December. However, so far in 2021, it has only increased by around 450%. If the prices follow the same pattern, that will put us on track for a year-end BTC price of around $ 138,000.

This estimate is eerily close to the year-end price of $ 135,000 predicted by the stock-to-flow (S2F) model, which continues to be the most accurate prediction of Bitcoin prices. Indeed, the closing price of BTC in August is, more or less long term, exactly as predicted by S2F creator PlanB in June, and September could be on track to follow suit.

Bitcoin holds on

The numbers show that BTC yields do indeed decline over time in consecutive bull cycles. But that shouldn’t come as a surprise to anyone, given Bitcoin’s business model. Michaël van de Poppe, UKTN contributor and full-time trader, agrees, telling UKTN:

“Investors shouldn’t worry. It’s actually a natural habit for the markets to slow down and have longer cycles. This is something that we will see more often in the future and which will actually open the doors to more investors. The less Bitcoin will oscillate with their daily performance and movements, the better as an asset in your wallet.

However, the progressively diminishing returns should not detract from the fact that Bitcoin offers, in all respects, a healthy performance, in line with the most optimistic forecasts. According to Igneus Terrenus, communications manager at Bybit, BTC is still by far the go-to coin for newcomers - institutions or individuals - entering the space. He told UKTN:

“Bitcoin remains the best investment grade crypto asset for institutional investors. And a relatively more stable lineup model may actually help Bitcoin’s case as an alternative to gold and fuel its long-term rise. When you zoom out five or 10 years - horizons familiar to whales and institutional investors - Bitcoin’s returns beat it all. “

It’s also impossible to say if any of the recent platform token rallies would have happened had BTC languished in long-term bearish territory, as money tends to flow from BTC.

Additionally, the models show that there is still every reason to believe in a year-end BTC price above six digits. Gregory from Currency.com agreed despite the growing demand for platform tokens. He told UKTN: “BTC is outperforming the market but is currently being held back by macro market trends and events on Wall Street. However, historically the fourth quarter has been the strongest for BTC, and history is likely to repeat itself before the end of 2021. “

Nonetheless, while BTC is unlikely to lose its status as a flagship crypto asset, the surge in altcoins undeniably offers greater opportunities right now for those who think they can time the markets.